Reformers once believed that publicly built apartments would be an improvement over the slums they replaced. Today we know how wrong those reformers were. Public housing has bred long-term dependency; in New York City, public-housing tenants remain in the system, on average, for 20.1 years, free from the time limits that apply to other forms of welfare. A perverse federal requirement that rent be set as a percentage of income discourages families from striving to earn more and better their circumstances, since that would just hike their rent. From a social-policy standpoint, public housing is rightly considered a disaster.

Less widely recognized is that it has counterproductive economic effects as well, contributing to what I call the “frozen city”—a place where the normal turnover that characterizes the use of property is impeded, costing the city billions in revenues and making it harder for newcomers to find an affordable place to live. If New York shrank public housing, with an eye toward ultimately phasing it out, the city would solve two problems at once. Not only would hundreds of thousands of residents be freed from long-term dependency; public-housing property would be available to serve new uses, generate new revenues, and accommodate newcomers’ ideas and energies.

Public housing in New York City comprises some 178,000 apartments in 340 projects made up of 2,600 buildings. It occupies 2,500 acres of real estate, a city within the city. With so much space permanently frozen in public housing, newcomers—immigrants, young professionals, artists, and the ambitious of all sorts—must compete for apartments in an artificially constrained private-housing market, driving up prices and increasing demands for yet more subsidized “affordable” housing, which would make the problem of the frozen city even worse.

In a further irrationality, a startling 22.8 percent of the city’s public housing—a total of 40,654 apartments—is “underoccupied,” in the parlance of the New York City Housing Authority (NYCHA). That is, these apartments have more bedrooms than residents to use them. Blame tenant immobility: for instance, after their kids move out, sometimes into public housing of their own, mothers stay behind with the extra bedrooms. (This is part of the reason that as of 2000, census figures show, New Yorkers as a whole were 7 percent more likely than the average American to have lived in the same place for five years.) The system is therefore inefficient even at its own task of housing the poor—a truth evident in the Mott Haven section of the South Bronx, where immigrant families live doubled or tripled up in private apartment buildings surrounded by giant, underused public-housing towers.

Public housing doesn’t just make private housing more expensive; it also hurts neighborhood prosperity by radiating blight. Developers and entrepreneurs would flock to East Harlem, for example, if not for the heavy concentration of public housing there. “We’re surrounded on all sides” by the projects, one East Harlem property manager told me. “They’re an eyesore, and there’s an awful lot of runoff, whether crime or drugs. If we had even half the number of projects, we’d be the next East Village, with our proximity to midtown and the Number 6 subway train running right through the neighborhood.”

And then there’s the little matter of the gigantic drain on the fisc. The Housing Authority’s 2009 budget is $2.7 billion. When Housing and Urban Development secretary (and former New York City housing commissioner) Shaun Donovan recently came to town, he announced that $423 million in federal stimulus funds would go toward the long list of deferred maintenance matters that plague the NYCHA—including $70 million just for elevator repairs and another $200 million for energy efficiency. Left unaddressed was public housing’s chronic inability to generate adequate rent revenue to maintain itself. (Remember that the inventors of public housing assumed that it would be self-sufficient after the initial public expense of building it.)

It’s past time to recognize the many ways that public housing harms both its beneficiaries and the city and to begin working for its eventual abolition. A first step would be imposing a time limit on tenancy for those in underoccupied units—or, alternatively, requiring them to move to smaller ones. New tenants should also face time limits, making it less likely that the young single mothers who dominate public housing’s non-elderly population would find the system attractive, and giving them an incentive to improve their situation.

A reformed public-housing system could become gradually smaller, with projects on desirable sites eventually sold to private owners. Make no mistake: though much public housing is poorly maintained and crime-ridden, many of the sites it occupies would otherwise be extremely desirable. To its credit, the Housing Authority has had its properties assessed, and the figures are startling. The hulking Ingersoll Homes, near the Brooklyn waterfront, are valued at $38 million; the Wagner Homes, in East Harlem, at $73.4 million; the Grant Houses, on 125th Street, at $59.8 million; the Wald Houses, on the Lower East Side, at $67 million; the Campos Plaza project, also on the Lower East Side, at $73 million. The most recent valuation of the city’s entire stock of public housing, as of June 30, 2008, was a staggering $4.3 billion. Selling it gradually wouldn’t merely raise a tidy sum for the city; it would expand the real-estate market, offering, among many potential uses, living space to new residents eager to become hardworking New Yorkers.

Part of the considerable proceeds of such sales could fund an endowment to help maintain the projects still under public ownership. A core system might remain, perhaps providing short-term transitional housing. And private owners might continue to operate many projects as housing for those of modest means.

Phasing out New York City’s public housing need not be a draconian undertaking. Other American cities prosper without anything close to New York’s vast empire of public housing (which amounts to almost one-fifth of the total stock of public housing in America). Both the apartments and the land on which they stand are resources that the city could put to much better use than it does today.

Howard Husock, a contributing editor of City Journal, is the Manhattan Institute’s vice president for policy research and the director of its Social Entrepreneurship Initiative.